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S&P Stuck in Worst Streak This Year Faces Quadruple Witching

(Bloomberg) -- Equity bulls frustrated with this year’s longest stretch of declines can blame it on a regular market event happening today.

That’s when the quarterly expiration of futures and options on indexes and individual stocks, known as “quadruple witching,” takes place. Typically it coincides with the rebalancing of the S&P 500 Index, spurring volatility and active trading.

Heading into today’s session, which follows a 1 percent drop in Chinese stocks, the S&P 500 has fallen four straight days and its push beyond 2,800 fell short for a second time in the past month. To Russ Visch, a technical analyst at BMO Nesbitt Burns Inc. in Toronto, the weakness is nothing to worry about as volatility tends to go up when fund managers try to adjust positions using new derivatives.

“We’re not too bent out of shape regarding the low volume sell-off,” Visch wrote in a note. “Given the massive volatility spike in early February and the associated scramble to manage/insure against it, this latest price action shouldn’t be too surprising as derivative positions are wound down or pushed out,” he added. “You have to allow for a lot of ‘wiggle room’ as the process unfolds.”

But volume will pick up, at least for a day, if history is any guide. Last time “quadruple witching” and an S&P 500 rebalancing took place, on Dec. 15, the market had the busiest day of the year with 10.7 billion shares changing hands.

This time, the rebalancing could force $23.1 billion of trades, up from around $18.6 billion a year ago, S&P Dow Jones estimated on March 12.

In addition, FTSE Russell is also implementing index rebalances today. Together, global stocks may be set up for “a big trade,” Investment Technology Group wrote in a note earlier this week. According to the firm’s estimate, the shuffling in Russell gauges could lead to $5.5 billion in trading.

Watch out for Chinese stocks such as Alibaba Group Holding Ltd. and Baidu Inc., as trading in these shares is likely to be especially active once FTSE allows an additional 25% weighting of eligible stocks to be included in its global indexes, ITG said.